New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

ECON Test 1 Study Guide

by: Nazifa Islam

ECON Test 1 Study Guide ECON 2110

Marketplace > Clemson University > Economics > ECON 2110 > ECON Test 1 Study Guide
Nazifa Islam

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Book notes, condensed lecture notes, previous test questions-answers-and my explanation
Principles of Economics: Microeconomics
Andy Hanssen
Study Guide
50 ?




Popular in Principles of Economics: Microeconomics

Popular in Economics

This 59 page Study Guide was uploaded by Nazifa Islam on Monday September 12, 2016. The Study Guide belongs to ECON 2110 at Clemson University taught by Andy Hanssen in Fall 2016. Since its upload, it has received 22 views. For similar materials see Principles of Economics: Microeconomics in Economics at Clemson University.


Reviews for ECON Test 1 Study Guide


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 09/12/16
Econ 2110 August 22 Reading CT – Chapter One THE BIG IDEA 1. Big Idea One: Incentives Matter a. (Rewards and penalties that motivate behavior) b. Fame, power, reputation, sex, love 2. Big Idea Two: Good institutions align self interest with the social interest a. Sometimes, “greed is good: b. Market incentives can sometimes be too strong i. Overfishing 3. Big Idea Three: Tradeoffs Are Everywhere a. It’s possible that something could be too safe b. Tradeoffs are closely related to opportunity cost c. Opportunity Cost: The values of the opportunities lost 4. Big Idea Four: Thinking on the Margin a. Constantly weighing the benefits and costs before making a decision b. Marginal Cost: The additional cost from producing a little bit more c. Marginal Revenue: The additional revenue from producing a little bit more d. Marginal Tax Rate: The tax rate on an additional dollar of income 5. Big Idea Five: The Power of Trade a. The real power of trade is the power to increase production through specialization b. Self-sufficiency is death c. Specialization increases productivity 6. Big Idea Six: The importance of wealth and economic growth a. Wealth is the ability to prevent and that comes from economic growth i. Example: malaria 7. Big Idea Seven: Institutions Matter a. It’s important to have property rights, political stability, honest government, dependable legal system, and competitive and open markets 8. Big Idea Eight: Economic booms and busts cannot be avoided but can be moderated a. No economy grows at a constant pace 9. Big Idea nine: Prices rise when the government prints too much money a. Inflation: One of the biggest issues in Macroeconomics i. An increase in the general level of prices ii. Makes people feel poorer iii. Makes it hard to understand the real value of goods iv. Comes about when there is a sustained increase in the supply of money v. Federal Reserve regulates all of this 10. Big Idea Ten: Central Banking is a Hard Job a. Hard to balance between inflation and recession The Biggest Idea of All: Economics is fun. It teaches us how to make the world a better place. August 24 th MBN Chapter 1 and 3 Chapter One • FDA got its power in 1906 o Stopped using rum-laden concoctions, cocaine-based potions • 1963 amendments removed the time constraints on the FDA o Before, they had 180 days to make a decision o Drastically increased the costs of introducing a new drug o $800 million or more for each new drug o Resulted in a drug lag • Type 1 Error: Not safe, not effective • Type 2 Error: Should be introduced, but isn’t released o Cost: Pain, suffering, and death 1. There is no free lunch, every choice entails a cost a. In a world of scarcity, we can’t have more of everything, so we have to give up some things 2. The cost of an action is the alternative that is sacrificed a. Costs don’t have to be monetary 3. The relevant costs and benefits are the marginal (incremental) ones a. Look at marginal benefits and the marginal costs 4. People respond to incentives 5. Things aren’t always as they seem 6. Policies always have unintended consequences and as a result, their net benefits are almost always less than anticipated Chapter Three • We live in a world of scarcity- to get any good, we must give something up • As the degree of safety rises, the total benefits of safety rise, but the marginal benefits of additional safety decreases • In order to be economically efficient, it’s good to have marginal cost of increasing something equal the marginal benefit of that increased something • If the marginal benefit exceeds the marginal cost, then it’s worth it • Information is a scarce good: it’s costly to obtain th August 29 MBN Chapter Four • Fundamental and legal institutions of society are responsible for economic growth • Political stability, secure private property rights, and legal systems based on the rule of law are important • If a country has these things, it will in turn raise capital stock because people will want to invest in projects • Many legal systems around the world today are based on either the English common law system or the French civil law system • Common law system favors a limited for for limited government role and emphasize importance of judiciary • Civil law systems favor the creation of a strong centralized government • Security of property rights are much stronger in common law systems • In civil law systems- there’s changes in rules that make people hesitate to make long term fixed investments o Slows economic growth and lowers the standard of living August 31 st CT Chapter Two The Power of Trade & Comparative Advantage • Specialization increases productivity, it’s impossible to have trade without it • Makes sense to divide knowledge across any brains …then trade • Absolute advantage: If the same good can be produced using fewer inputs than another country • Production Possibilities Frontier (PPF): Shows all combinations of goods that a country can produce given its productivity and supply of inputs • A country has a comparative advantage in producing goods for which it has the lowest opp. cost • The theory of comparative advantage states that a country should make more of what they can at a low cost and buy goods that would be a high cost for them to make • Adam Smith (Famous economist) wrote The Wealth of Nations th September 5 MBN Chapter 29 and 30 Chapter 29 • Worldwide market gives us foreign exchange currencies • Foreign exchange rates are a function of world supply and demand • But supply and demand of currencies relies on supply and demand of traded goods • But there’s many goods that are considered non-traded goods o Houses, house-cleaning services, haircuts o These things don’t get exchanged over country borders • Nontraded goods create a bias…in poorer countries these services will be cheaper • Therefore we use current exchange rates based on traded goods • But we still have to adjust the rates to consider the actual living costs of different countries • We do this by a concept called purchasing power parity (type of adjusted foreign rate) o It’s still difficult though • So we can get a sense of idea through the cost of Big Mac’s o If they’re 4 here and $6 in Switzerland it gives us the general idea that the cost of living is a little higher there Chapter 30 • NAFTA has decreased the trade barriers between the U.S., Canada, and Mexico by a lot • 150 countries are apart of WTO (World Trade Organization) • voluntary trade creates new wealth • Globalization means that trade seems very seamless • Protectionism- Kind of against globalization in an effort to protect American producers at the expense of of consumers and other producers • Smoot-Hawley Tariff: Wanted to discourage imports • In the long run, imports are paid for by exports • Any restriction on imports leads to a reduction on exports • People who oppose globalization state that other countries participate in dumping o Dumping is selling their goods in America for a lower cost o Meaning they’re at a loss o They do this so we buy products because of the low price that we generally would have never considered buying • Labor practices in other countries are an issue because sometimes they don’t meet americans environmental standards • Environmental quality is a luxury good • Achieving high standards is either costly and trade restricts are not the best way to be most efficient • In conclusion, American’s are better off because of globalization 09/07 Chapter Six • When you drive a car, you generate a variety of costs • Private costs: fuel, vehicle wear and tear, value of the driver’s time • Congestion of the road is a combined cost that everyone has to endure • So going on to the highway, and adding to the congestion, I am indirectly increasing the cost for other drivers o The cost being the value of their time since I am helping slow traffic down • So why do we care about congestion? o Because maybe we would be better off if we had to pay money to use the road – then there would be less congestion o People would seek alternatives- public transportation, carpooling • But toll roads may not be a good idea o It adds to the congestion- cars having to stop and pay o To reduce costs substantially, many roads have switched over the the electronic toll collection system o This way drivers are better off (don’t have to stop) and the government earns some extra revenue • Some countries make you pay a congestion toll during certain hours (6AM- 630AM) • It’s better if toll roads are managed by the government instead of privately (knocks away unfair pricing) • People who oppose tolls think we should either have more roads built or have a mass transit system o Both will reduce congestion but only temporarily Chapter 31 • Many speeches are given about how it’s important to protect the U.S. from the evils of globalization • So that means imposing tariffs (taxes) on imported goods or quotes (quantity restrictions) which will physically limit imports • U.S. jobs are in no danger of becoming extinct • People just wanted to be protected from competition • Trade- quid pro quo- something for something • If we restrict international trade, we reduce benefits • So imposing trade restrictions to save jobs in the import industries has the effect of costing jobs in the export industries • By imposing trade restricts, the costs of foreign goods go up for consumers o Have to compensate for high tax so prices are raised • When imports to the U.S. are restricted, our partners will buy less of what we produce o This reduction will lead to a reduction of jobs for the workers • The cost of protecting jobs in the short run is huge, but in the long run it’s impossible 09/12 Chapter 8 • Fracking is the informal name given to the hydraulic fracturing process in which water, sand, and small amounts of chemicals are injected deep underground to break rock apart • It’s a major public issue • Some believe fracking leads to cheap, relatively clean energy • Others believe fracking is linked to causing earthquakes and groundwater contamination • They also believe that even though fracking may be clean, it’s not as clean as other energy sources o Thus, a tradeoff • The lower gas prices are bringing back to America manufacturing activities that had moved offshore o The wealth of America is higher in every dimension, including the environmental one • Nothing in life is free- so fracking isn’t • Although fracking itself occurs away from water sources, some of the gas may escape the pipe o Gas that escapes is gas that cant be sold o May leak into aquifer and contaminate water • Conventional oil and gas production can cause small quakes o Also geothermal power can induce earthquakes • Fracking also uses a lot of our water • In America, the rights to minerals under the surface (oil, gas, gold, etc.) typically belong to whoever owns the land • In Europe and many other countries, what’s under the land belongs to the central government o So landowners make nothing • For the majority of people in America, fracking seems to promise an improvement in the quality of their lives o Energy costs and air pollution are reduced LECTURE 8/22 • Allocation of resources: where the prices are high/low • How should resources be allocated? o What to make, how to make it, who gets to consume it? o All societies need to answer this • In markets, prices send signals of values • We live in a world of scarcity • “Scarce” doesn’t mean “rare” o A good is scarce if you have to give up something to get more of it o Diamonds are scarce and rare o M&M’s are scarce but not rare • Because of scarcity, we are constantly facing choices o Should we use that field for corn or build houses? • Economics provides a model of how choices are made • Models are never realistic and it depends on its ability to predict • Principles of the economic model 1. Life consists of trade-offs a. In order to get x (benefit), give up y (cost) b. No such thing as a “free lunch” 2. As benefits and costs change, trade offs change, some people change what they do a. People respond to incentives 3. In responding to tradeoffs, rational people make their choices at the margin a. Consider the benefits and costs of a particular action b. Act only when the marginal (additional) benefits exceed the marginal (additional) costs c. Would I be better off studying econ for the next hour or doing something else 4. The true cost of something is what you must give up to get it a. Opportunity cost b. Costs are expressed in monetary terms, but don’t need to be c. An hour of sleep, studying, taking a walk d. $10,000 isn’t important, it’s what you would have done with it (cost) e. “Cost” and “price” may be used interchangeably 5. Trade makes people better off a. Trade is a voluntary activity b. Trade moves goods from lower to high value uses c. Increase in value: “gains from trade” or “surplus” • As the stakes rise, the more you consider MB and MC • The economic model is positive, rather than normative • Positive statement: addresses the consequences of an action • Normative statement: expresses a value judgment • A prediction is only useful if it can be TESTED 8/24 • Things are worth investing only if the benefits of additional safety exceed the costs (marginal benefits vs marginal costs) • Marginal means additional • It’s possible to get negative benefits 8/29 • Historical costs are irrelevant o Only opportunity costs matter • Marginal costs are always opportunity costs • We value money because it represents opportunities • Because all goods are scarce, each time we make a choice, we give up the opportunity to do something else • Life consists of tradeoffs • The true cost of any action is what we must give up o And that’s what ALL costs are o To highlight the point, we use the term “opportunity cost” • Opportunity costs affect behavior • The opp. Cost of anything is the next best alternative because that is what is sacrificed 8/31 • Trae is a voluntary activity-parties only trade because they expect to be better off • Gains from trade (economic surplus) • Trade moves goods from lower value uses to higher value uses • Value depends always on potential use • Trade is “mutually beneficial” • Creating the trust necessary for markets to function may be costly • Markets don’t work well everywhere “crony capitalism” o Good institutions and rule of law allow markets to function well • Trade is at the heart of the economic model • Specialization is why we’ve seen an enormous increase in wealth over the last few centuries 9/05 • A ban on voluntary exchange cannot make the exchanging parties better off • In order to evaluate a policy, you must consider its effect on incentives • A voluntary aspect of exchange underlies assumption that exchanging parties are better off • You could be good at doing something like ironing and being a talk show host (absolute advantage), but Oprah is better at being a talk show host (comparative advantage) o Her opportunity cost to iron is way too high • Absolute advantage is irrelevant 09/07 • For trade to occur, the value to the buyer must be greater than the opportunity cost to the seller • Buyers and sellers reveal their values through their willingness to buy and sell at various prices • But lack of information can limit the gains from trade o Discovering takes time and effort (information is costly) • Those who find ways to disseminate useful information can benefit accordingly o Middleman, brokers 9/12 • Trade makes consumers better off • Comparative advantage applies to individuals and firms • International trade is unavoidable • When one trading partner gets more productive, both trading partners benefit o When you get better at something, you become comparatively worse at the other thing I-CLICKER TEST QUESTIONS 1. A well-designed and enforced law banning child labor a. Make working children better off b. Make working children worse off c. May make working children better or worse off*** 2. Smith accidently runs his car off the road into deep snow. Jones happens along in a tow truck and offers to haul Smith out for the outrageous price of $500. Smith, though angered by the high price, would be stuck out all night otherwise, and pays the $500. As a result of the trade a. Smith is better off and Jones is worse off b. Jones is better off and Smith is worse off c. Both Jones and Smith are better off** d. Both Jones and Smith are worse off PREVIOUS EXAM QUESTIONS, ANSWERS, & EXPLANATIONS 1. If you’ve purchased an all you can eat ticket to a clam roast for $25, good economic thinking would tell you to take one last plateful if a. the value of that plateful to you is greater than $25
 b. the value of that plateful to you is greater than or equal to $1 and you’ve already taken 24 platefuls that you value at $1 each.
 c. the value of that plateful to you is greater than zero.** d. none of the above The marginal cost of each plateful is $0 because you’ve already paid $25 for the all you can eat clam roast (sunk cost), so it doesn’t matter if you eat or don’t eat- but if you choose to eat, it’s because you value it more than 0, because that’s your marginal cost. 2. If you decide to go to a movie this evening rather than study economics, you thereby demonstrate that a. you don’t care about getting good grades hate economics 
 c. you would rather have fun than fulfill your responsibilities the margin, you value two hours of movie watching more than two hours of 
studying economics** 
 e. none of the above. 
 At the margin is where you compare your two choices and it’s the one you value the most. It’s a particular choice, not overall 3. The costs that influence decisions are always a. average costs. 
 b.marginal costs** 
 c. sunk costs. costs. 
 Sunk costs are costs in the past. Total costs are what the buyer and seller benefit added together. 4. If you pay $400 for a season pool pass at a private club, the marginal cost to you of swimming on any given weekday will be a. $400. 
 b.$10 if you swim 40 times. 
 c. $20 if the swim season lasts twenty weeks. 
 d.$3 if the swim season lasts twenty-one weeks and there are seven days in a week 
 e. zero** 
 You already paid for the ticket (sunk cost) so it doesn’t matter if you go or not. If you go, it’s because you value it more than zero. 5. You want to purchase two pizzas. The price is $8 per pizza, 2 for $15, 3 for $20. What will be the marginal cost to you of buying a third pizza? a. $20. 
 c. $7. 
 e. zero, if you don’t plan to eat the third pizza (it becomes a sunk cost 
 So the decision is between buying 2 slices or 3 slices. The cost for one more slice is $5 6. I am considering joining a “shopper’s club”, where I pay $100 membership fee and then get a twenty-five percent discount on all my purchases. In making my decision, I should a. only join if I plan to make at least $100 of purchases 
 b.ignore the membership fee since it is a sunk cost 
 c. only join if I expect to get at least $100 worth of discounts** 
 d.only join if they promise to refund my membership fee if I’m not satisfied 
 You’re going to end up buying these goods anyways..whether it’s through the shopper’s club or not. So the thing to look at is if you at least get even. $100 for at least $100 discount. The cost is $100 and you’re looking for a benefit greater than or equal to 7.If Clemson raises the price of on-campus parking, you would expect to see a. a decrease in the demand for on-campus parking 
 b. an decrease in the supply of on-campus parking 
 c. an increase in the demand for off-campus parking** 
 d. all of the above 
 When the costs go up, people look for alternative methods. The demand for on- campus parking is already going to go down, but look at the choice that states or explains what will be the ultimate outcome. 8.Which of the following is true of the statement “All pollution must be stopped”? a. It ignores the importance of comparing marginal benefits and marginal costs 
 b. It does not consider that we may have too much pollution control 
 c. It ignores the fact that to get more of anything, we must give up something else 
 d. all of the above** 
 9.If you buy a motorcycle for $1000 and then discover that you hate riding it and will never ride it again, the best thing to do is a. keep the motorcycle because you’ve paid so much for it 
 b. keep the motorcycle unless you can find someone who will pay you at least $1000 for 
 c. sell the motorcycle for the best offer you can get** 
 d. sell the motorcycle for the best offer you can get, as long as it covers most of what 
you paid for it 
 You no longer have a use for it so it doesn’t matter how much you paid for it because it’s a sunk cost. You’re looking for the best offer you can get. 10. Which of the following is a substitute for gasoline? 
 a. ethanol.
 b. car pool.
 c. more fuel efficient cars. d. All of the above ** 11. You are searching for a new pair of skis, it makes sense to keep looking as long as a. you haven't found the lowest price available.
t b. the shopping time matters less to you than the lower price you expect to get.** c. there are stores left that you haven't checked. d. you face no opportunity costs at all. e. All of the above. This compares two decisions where you choose the one you value more 12. If Switzerland can make 35 pounds of chocolate or 5 watches while Albania can make 6 pounds of chocolate or 1 watch a. no trade will be profitable for Switzerland. trade will be profitable for Albania. 
 c. Albania has higher opportunity costs than Switzerland. 
 d.Switzerland has higher opportunity costs than Albania. 
 e. None of the above.** 
 The answer choices don’t specify which opportunity cost 13. If Switzerland can make 35 pounds of chocolate or 5 watches while Albania can make 6 pounds of chocolate or 1 watch, who has the comparative advantage? a. Switzerland has the comparative advantage in both chocolate and watches. 
 b.Albania has the comparative advantage in both chocolate and watches. 
 c. Switzerland has the comparative advantage in chocolate; Albania in watches.** 
 d.Albania has the comparative advantage in chocolate; Switzerland in watches. 
 e. There is not enough information to say. 
 If we were to look at absolute advantage, Switzerland would have it in both. But when it comes to comparative advantage, it’s what would happen if one country had to specialize in something…the smartest pick 14. A trade that can make both countries better off would be a. one watch for 7 pounds of chocolate. 
 b. one watch for 6.5 pounds of chocolate.** 
 c. one watch for 6 pounds of chocolate. 
 d. one watch for 7.5 pounds of chocolate. 
 e. No such trade exists. 
 Figure out the ratio…Switzerland is 35:5 and Albania is 6:1 and you want to get that in the most simplified term. So Switzerland is 7:1 and Albania is still 6:1. So meet in the middle of both ratios, 6.5:1 15. Anyone who claims that cheaper labor in one country enables that country to produce everything at lower costs than another country, so that no trade is possible, is a. exaggerating the importance of labor costs. 
 b. referring only to comparative, not to absolute cost. 
 c. not referring to monetary costs because they are measured in differing 
 d. not considering opportunity cost.** 
 You can think that one country is the best at everything (absolute advantage) but that ultimately isn’t realistic because it means they have to allocate time, money, and resources to do a job that would take away from the amount of something else they can do better that another country can’t compete with 16. We know that trade makes people better off because
 a. it is a voluntary activity.
 b. people wouldn’t engage in it otherwise.
 c. it only occurs when there is the potential for gains. d. All of the above.** 
 Voluntary trade always makes us better off 17. If it costs a theater $180,000 to put on four shows, and the cost would rise to $200,000 if the theater adds a fifth show, a. the marginal cost of the fifth show is $20,000.** 
 b. the marginal cost of the fifth show is $40,000. 
 c. the marginal cost of the fifth show is $200,000. 
 d. the marginal cost of the fifth show is $50,000. 
 Marginal cost means the cost of just one more- doesn’t look into sunk costs 18. Which of the following costs will you consider when deciding whether it is efficient to take a hike one afternoon? a. The gas it takes to get to the hiking trail. 
 b. The studying you won’t be able to do. 
 c. The wear and tear on your hiking boots. 
 d. All of the above.** 
 e. Just a and c. 
 These are all the opportunity costs- what you’re giving up to go hiking 19. If you pay $2 for each ride you take on a roller coaster, and you are about to take your tenth and last ride for the day, the marginal cost of that ride is
 a. 0.
 b. $2.** c. It depends on the benefits you receive. d. $20.00. Marginal cost is the cost of just one more I can cut down 4 trees or dig 12 holes in an hour. You can cut down 3 trees or dig 6 holes in an hour. Use these facts to answer the next 3 questions. 20. The cost of one of my trees is a. 3/4 of your trees. 
 b. 12 holes. 
 c. 3 holes.** 
 d. depends on how much I like trees. 
 e. depends on how much you like trees. 
 Simplify it down. 12/4=3 21. We could both be made better off if I a. specialize in digging holes.** 
 b. specialize in cutting down trees. 
 c. specialize in both digging holes and cutting down trees. 
 d. let you specialize in both digging holes and cutting down trees. 
 C and D are stupid because it doesn’t take into account the opportunity costs. This person can dig holes much faster 22. A trade that would help us both is a. one of my holes for 4 of your trees. 
 b. one of my trees for 1/4 of your holes. 
 c. one of your holes for 1/5 of my trees. 
 d. one of your trees for 2.5 of my holes.** 
 You make them into ratios first. 4:12 and 3:6. This simplified down would be 1:3 and 1:2. Meet in the middle and it’s 2.5 23. You are considering whether to take one last ski run before going home. You paid $30 for your lift ticket (which gives you the right to ski all day), and have taken nine runs. It is only efficient for you to take a tenth run if a. your marginal benefit is greater than $30. 
 b. your marginal benefit is greater than $3. 
 c. your total benefit will end up greater than $30. 
 d. your marginal benefit is greater than 0.** 
 e. your total benefit ends up greater than your total costs. 
 Sunk costs don’t matter 24. If you are searching for a new pair of skis, it makes sense to keep looking as long trade that would help us both is a. the shopping time matters less to you than the lower price you expect to get.** haven't found the lowest price available. 
 c. there are stores left that you haven't checked. face no opportunity costs at all. 
 e. All of the above.
 This compares two costs and you will choose which the one that you value the most. If you care the most about getting the lowest price, then that’s the highest priority This is a schedule of the marginal benefits and marginal costs for product “X”. Quantity 1 2 3 4 5 Marginal $15 $10 $8 $7 $2 benefit Marginal cost $6 $7 $7 $8 $9 25. Use the marginal principle to predict how much X will be consumed.
 a. 5, as you get total benefits of $42 versus a total cost of $37.
 b. 4, as you get an average benefit of $10 versus an average cost of $7. c. 3**
 d. 1, as you get a net benefit of $9. 
 You stop at the last point where you can benefit. Doesn’t matter the amount, if you can benefit, you keep going. 26. If those benefits and costs are yours, how much would you be willing to pay for a pass that would let you consume all the X you wanted?
 a. $8
 b. $15 c. $33
 d. at least $42.** 
 Add up the befits 27. If they charge you $12 for an “all you can consume” pass, how many will you consume? a. None, as it is not worth paying that price given the benefits. 
 b. 1 
 c. 3 
 d. 4 
 e. at least 5.** 
 If you didn’t pay for an all you can eat pass then you would see that the marginal cost of 5 is $9 and you would try to exceed that 28. Smith accidentally runs his car off the road into deep snow. Jones happens along in a tow truck, and offers to haul Smith out for the outrageous price of $300. Smith, though angered by the high price, considers he has no choice and pays the $300. Smith’s welfare was _________ and Jones’ was ________ as a result of Jones passing by. a. enhanced, reduced. 
 b. reduced, enhanced. 
 c. unchanged, enhanced. 
 d. enhanced, enhanced.** 
 e. reduced, reduced. 
 Enhanced just means that they were both better off. Jones made money and Smith wasn’t left helpless with his car 29. If a buyer values a product at $19 and a seller’ opportunity cost of selling the product is $14, the gains from trade a. can’t be determined without knowledge of the price. 
 b.are $19. 
 c. are $14. 
 d.are $5.** 
 e. are $33. 
 Gains from trade always means you subtract the costs 30. Which of the following is the most important advantage to a society of using money rather than relying exclusively on barter? a. The use of money encourages people to diversify and learn to do more things for 
 b.The use of money encourages people who want to exchange to become more 
closely acquainted. 
 c. The use of money lowers the cost of exchanging goods.** 
 d.The use of money reduces opportunities for fraud and theft. 
 e. The use of money reduces selfishness because money in itself has no value. 
 Since money is a universal thing, people can use it according to how much they value the good 31. Based on the concept of opportunity cost, where would you expect to have the least trouble finding someone to clean your house? a. In a high-income area with low unemployment. 
 b.In a low-income area with high unemployment.** 
 c. In a middle class area with medium unemployment. 
 d.In any area, because there’s always someone willing to clean house. 
 Opportunity costs means the cost of giving up something. In a low-income area with high unemployment, there isn’t much to give up because they could be using their time (cost) to make money that they’re not making currently (cost) 32. The real cost of any action a. depends upon the number of suppliers the cost to the consumer plus the cost to the producer 
 c. is greater when demand shifts the value of the alternative sacrificed** 
 e. all of the above 
 Opportunity cost 33. Movie-goers who are willing to put up with long lines at a cinema to get a lower price are a. not rational 
 b.haven’t evaluated the marginal cost of the time they give up 
 c. would give up any amount of time to save a little money 
 d.all of the above. 
 e. none of the above.** 
 A is an opinion, B doesn’t work here because maybe they don’t anything better to do and value saving money in this situation, C is an opinion 34. Which of the following explain my decision to go to the weight room rather than to a movie? a. I value exercising more than movie watching 
 b.I feel better if I work out 
 c. The marginal benefits of working out rather than going to a movie exceed the 
marginal costs** 
 d.I like to exercise more than I like to watch films 
 e. all of the above 
 It’s just whichever choice you value more 35. How can I raise the cost of coming to class? a. charge an admission fee 
 b.schedule class at inconvenient times 
 c. give extra homework to anyone who shows up 
 d.all of the above** 
 e. none of the above 
 These are all factors that would make you rethink how much you value coming to class 36. The idea that human behavior is “self-interested” assumes that people want 
 a. more of everything 
 b.material goods but not spiritual goods 
 c. money advance projects in which they are interested** 
 e. all of the above 
 Doesn’t mean they want more of everything- it means they more of what they value more 37. An article in the newspaper suggests that an Indian tribe should use coal rather than gas power because the tribe owns 114 billion tons of coal reserves. This statement a. is true because if they own the coal, they don’t have to pay for it false because coal is more polluting 
 c. is false because it ignores opportunity costs** 
 d.none of the above 
 The coal reserves may already be used for something else 38. The cost to a ski instructor of taking a day off a. is higher on the weekend when more people ski.** 
 b.falls when it snows. 
 c. rises when it rains. 
 d.rises when there are a lot of other instructors around, so competition is intense. 
 It’s not D because it would take away from the amount of people needing an instructor just because there’s so many around. The competition would actually take away from the hype. The choice is A because it compares it to other days when less people ski (weekdays), 39. You see this deal at the supermarket: one frozen pizza for $3.00, two for $5.00. Your marginal cost for the second pizza is a. $5.00
 b. $3.00
 c. $2.50 d. $2.00** e. zero. Marginal cost means the cost of just one more. That’s why you find the difference 40. If you’ve bought an $80 sticker to park on campus, and you plan to park on campus eighty times before the semester ends, the marginal cost to you each time you park is a. $0**
 b. $1
 c. $8 d. $80 e. Negative You already paid for the ticket- sunk cost 41. If you paid $25,000 for your car just a short while ago, but the best offer you can get for it now is $12,000. You should only sell the car a. if its worth to you is less than $12,000.** 
 b.if its worth to you is less than $25,000. 
 c. if you can get something close to what you paid for it. 
 d.if you value it more than $12,000. 
 B is incorrect because that’s a sunk cost, same with C. D doesn’t make sense because if you valued it more then you wouldn’t sell it 42. The form of rationing we see most often in our society is a. queuing (waiting in line).
 b. lotteries. c. allocating goods through the political process. d. allocating goods according to need.
 e. price.** Price matters- I only have one car because prices limit me on how much I can have of something. D is a good distractor but sometimes people get more than they need because they want it, but it comes down to costs 43. Sunk costs are irrelevant to economic decisions because
 a. they don’t involve monetary expenditures, merely opportunity costs. b. opportunity costs rise with the quantity supplied.
 c. they don’t affect a firm’s profit.
 d. they don’t reflect what people actually value.
 e. they cannot be affected by the decision in question.** Sunk costs are in the past- nothing you can do about it anymore 44. In economics, the cost of something is a. the out-of-pocket expense of obtaining it. 
 b.always measured in money. 
 c. what you must give up to get it.** 
 d.always higher than people think. 
 OPPORTUNITY COST 45. The concept of opportunity cost suggests that the cost to airlines of allowing employees to fly for free a. depends on the alternatives available to the employees. zero. 
 c. depends on the value employees place on free travel. greater at Christmas than in mid-February.** 
 Because during Christmas time more people will be wanting to fly and so the cost of each seat is more valuable and if employees are given them for free then it takes away from the money the airlines could have been making 46. A good is “scarce”, as economists use the term, only when
 a. there is less than an infinite amount of it available.
 b. there is less of the good available than there was in the past. c. a shortage exists.
 d. something has to be given up to get more of it. ** 
 All goods are scarce though 47. Paul decides to spend an hour playing basketball rather than studying. The tradeoff a. is nothing, because he enjoys playing basketball more than studying. 
 b. is the benefit to his knowledge and grades he would get from studying for an hour. ** 
 c. is the increase in skill he would get from playing basketball for an hour. 
 d. only exists if he had originally planned to study, and then played 
basketball instead. 
 Tradeoff means what you would be giving up. D is a good distractor but isn’t right because the question helps us know that he was trying to decide between the two 48. The opportunity cost to college athletes on scholarship who stay in school a. are the wages they could make otherwise. ** 
 b. are the value of the scholarships they receive. 
 c. is nothing, unless they are good enough to turn professional. 
 d. underestimates the value of a college education. 
 Opportunity cost- they could be working and making money instead of going to school 49. Some welfare programs offer assistance to families only if there is no father present in the home. What effect would you expect such programs to have on the number of two- parent, low-income families? a. No effect, since family decisions are based primarily on factors much more important than welfare eligibility. 
 b. The number of two-parent, low-income families is likely to rise. 
 c. The number of two-parent, low-income families is likely to fall. ** 
 d. It is impossible to form any expectation about this situation. 
 This is a weird situation but people respond to incentives 50. Economics is a model of a. money. 
 b. buying and selling. 
 c. how people make choices.** 
 d. how people should behave. 
 51. The cost of letting senior citizens into a $5 movie for free a. is higher on a Saturday night than a Monday night. 
 b. is lower if the senior citizen would not have gone to the movie without the free pass. 
 c. is always $5. 
 d. All of the above. 
 e. Just a and b.** 
 The cost is that someone else could have bought the ticket and sat in that seat instead 52. The idea that “people respond to incentives” would lead us to conclude that single parent births a. will increase if public child support increases.** 
 b. should never happen. 
 c. result from complicated social conditions and are thus unaffected by 
public assistance. 
 d. depend only on the public assistance offered. The incentive would be an opportunity to make more money
 53. The fact that more pedestrians were killed after laws made cars safer demonstrates that a. people respond to incentives.** 
 b. laws usually have a bad effect. 
 c. people will always drive badly. 
 d. cars need to be made even safer. 
 It’s people thinking that since the cars of safer, they can drive a little more recklessly 54. Which of the following is an example of a scarce good? a. Coca Cola 
 b. Insulin 
 c. Diamonds 
 d. All are scarce goods.** 
 e. Just b and c 
 55. Can you ever have too much safety? a. No, because the more safe you are, the better off you are. 
 b. No, because people respond to incentives. 
 c. Yes, if the marginal benefits of safety are less than the marginal cost.** 
 d. Yes, but only if the total benefits of safety are less than the total cost. 
 e. Yes, because people usually don’t want to be safer. 
 If this is the case in a situation, don’t do it! 56. Economists use the term “opportunity cost” to highlight the fact that a. costs are really opportunities given up.** 
 b. most costs involve the opportunity to get something in return. 
 c. every opportunity also has its cost. 
 d. there are always opportunities to lower the cost. 
 Meaning the next best choice 57. You are considering renting a car and driving to Seattle for Christmas. Which of the following would be marginal costs that you will consider in making your decision? a. the car rental price 
 b. gasoline 
 c. wear and tear on the car 
 d. All of the above. 
 e. Just a and b.** 
 You don’t care about the wear and tear on the car because it’s a rental 58. If you stop studying biology and spend an hour studying economics instead, we can conclude that a. you like studying economics better than studying biology. 
 b. you’d rather spend whatever time you have studying economics than studying 
 c. you value one additional hour of studying economics more than one additional 
hour of studying biology.** 
 d. you value studying economics more than studying biology. 
 e. All of the above. 
 Just like previous questions 59. Could you ever have too much environmental protection? a. No, because it is important to protect the environment. 
 b. Yes, if the marginal costs are greater than the marginal benefits.** 
 c. No, because a clean environment is a scarce good. 
 d. No, because the benefits of a clean environment outweigh the costs. 
 e. Yes, if the demand for environmental protection is not very important. 
 Too much of anything isn’t good and doesn’t take into account the harm it could do. It’s like the example given in class about airport safety 60. A good is scarce when a. demand is greater than supply. 
 b. quantity demanded is greater than quantity supplied. 
 c. it is very rare. 
 d. there is a shortage. 
 e. something must be given up to get more of it.** 
 61. The economic model a. is about how money is made. 
 b. is about how people make choices.** 
 c. assumes that people care most about money. 
 d. assumes that people have no choices to make. 
 62. Grocery shoppers who are willing to pay high prices at one supermarket in order to avoid long lines at another a. are not rational shoppers. 
 b. would do anything to save money. 
 c. are comparing the benefits and costs of their choice.** 
 d. are not comparing the benefits and costs of their choice. 
 They value their time more than the cost difference 63. The cost of skipping class a. is higher the day of an exam. 
 b. depends on how much you like the class. 
 c. is not affected by the tuition revenue you paid. 
 d. All of the above.** 
 A is right because then you’re missing an exam opposed to a lecture, C is right because it’s a sunk cost 64. The idea that “people respond to incentives” would lead us to conclude that the murder rate a. would rise if tougher penalties are enacted. 
 b. would fall if tougher penalties are enacted.** 
 c. would be unaffected by changes in penalties, since crimes are committed in 
moments of passion. 
 d. depends entirely on the level of penalties enacted. 
 65. For which of the following is there a market? a. Orange juice. 
 b. Pedigree dogs. 
 c. Hiking in national forest land. 
 d. All of the above.** 
 e. Just a and b. 
 There are markets for just about anything!! 66. Good economic decisions are those for which a. marginal benefits exceed marginal costs.** 
 b. total benefits exceed total costs. 
 c. marginal costs are declining. 
 d. total costs are as low as they can be. 
 67. Could there ever be too little pollution? a. No, because pollution is something we do not want. 
 b. Only if people find some socially productive use for pollution 
 c. Yes, if the marginal benefits of the additional pollution reduction are less than the 
marginal costs.** 
 d. No, because pollution is bad for a person’s health. 
 68. Most economists believe that the assumption of rationality a. is how humans behave in all circumstances. 
 b. is the best argument for the economic model. 
 c. is not always a realistic assumption, but allows useful predictions to be 
made nonetheless.** 
 d. should be supported by teaching people how to act rationally. Models are good for predicting behavior and is a good comparision to see when thinking about If the world were perfect 
 69. The idea that “people respond to incentives” would lead us to conclude that class attendance would rise 
 a. if I take attendance and grade on it.
 b. if I give lots of surprise quizzes.
 c. if I offer money to students who come to class. d. All of the above.** Incentives are just seeing how you can benefit from a situation 70; Which of the following is an example of a scarce good? a. Big Macs. b. Television sets.
 All are scarce goods.** Scarce just highlights the fact that something must be given up to get it. The good doesn’t have to be rare 71. When society requires that firms reduce pollution a. there is no tradeoff, since lower pollution benefits everybody. 
 b. there is no tradeoff for society as a whole, since only a few firms are affected. 
 c. there is a tradeoff only if firms are forced to close down. 
 d. there is a tradeoff because firms and consumers will be left with less money.** 
 If firms are spending money to reduce pollution, they need to be compensated for the money somehow. So they’ll raise the price of goods that will affect the consumers 72. Which of the following is a resource allocation question? a. Should I have coffee or tea this afternoon? 
 b. Should we log Yellowstone National Park or leave the land alone. 
 c. Should we log Yellowstone National Park or mine Yellowstone National Park? 
 d. All of the above.** 
 e. Just b and c. 
 Resource allocation is pretty much just: which one do I choose? 73. Making cars safer could result in more accidents a. under no possible circumstances. 
 b. only if people are irrational. 
 c. only if designers are mistaken about how safe a car really is. 
 d. if people respond to incentives.** 
 People may drive more recklessly if they know they’re in a “safer” car 74. The cost of attending the last class before an exam includes a. whatever tuition you paid. 
 b. payments on the car that you drive to campus if you commute. 
 c. the cost of your dorm room you live in the dorms. 
 d. whatever you miss doing because you go to that class.** 
 e. All of the above. 
 All of these choices except D are sunk costs 75. Someone who, when confronted by a choice, says “It’s simple: do both!” a. is a high demander. an inefficient supplier. 
 c. doesn’t understand opportunity cost.** a go-getter. 
 76. If we as a country decide to dedicate more resources to making meat safe a. there will be less left over to do other desirable things.** 
 b. we will have too much safety. 
 c. we are not thinking at the margin. 
 d. we will never face another case of e-coli poisoning. 
 So if you allocate time and resources to that, you have to consider the opportunity cost 77. This means that dedicating more resources to making meat safer a. is a good idea. 
 b. is a bad idea. 
 c. may be a good or bad idea, depending on the marginal benefits and costs.** 
 d. is a rational plan. 
 78 If a buyer values a product at $28 and a seller’s opportunity cost of providing the product is $12, the gains from trade A. can’t be determined without knowledge of the price. 
 b. are $28. 
 c. are $12. 
 d.are $16.** 
 e. are $40. Gains from trade always means subtracting the difference 79. If England can make 10 umbrellas or 5 smoked fish in a day while Norway can make 5 umbrellas or 5 smoked fish a. England has the comparative advantage in umbrellas and Norway has it in fish.** b. Norway has the comparative advantage in umbrellas and England has it in fish c. England is better at both umbrellas and fish. d. Norway’s fish cost the same amount as England’s. 
 Comparative advantage means if they had to choose one to specialize in, which one would it be 80. In the absence of trade, what does a smoked fish cost in England? a. $2 per pound. b.There is not enough information to say. 
 c. One of Norway’s fish. 
 d.Two of Norway’s fish. 
 e. Two umbrellas.** 
 10/2=5 81. A trade that can make both countries better off would be a. 1 umbrella for 2 fish. 
 b. 2 umbrellas for 1 fish.
 c. 1.5 umbrellas for 1 fish.**
 d. No trade is possible since a smoked fish costs the same amount in each country. e. No trade is possible, because England is at least as good as Norway at producing 
both umbrellas and fish 
 Make ratios. 10:5 and 5:5 which reduced would be 2:1 and 1:1. Meet in the middle 82. You miss the last train home on New Year’s Eve. After walking for an hour, you spot a taxi. Its driver wants to charge $150 to take you home, though the ride usually costs $30. You are furious, but feel you have no other option and accept the deal. Finding the taxi a. has made you better off and the driver worse off. 
 b. has made you worse off and the driver better off. 
 c. has made both you and the driver better off.** 
 d. has made both you and the driver worse off. 
 e. has made the driver better off but left your well-being unchanged. 
 If you didn’t take the taxi, you would have had no way home 83. Your comparative advantage as a house painter (as opposed to as a student) a. increases during exam week. 
 b. increases during the summer vacation.** 
 c. depends only on how good you are with a paintbrush. 
 d. All of the above. 
 You’re giving up less during the summer because you have more free time (no school) 84. If you work an additional hour on your homework a. you give up an hour you could have spent doing something else.** 
 b. you don’t give up anything, because you are here to go to school 
 c. you give up something only if you could have spent your time on things more 
important than homework. 
 d. you give up something only if you could have used that hour to make some 
 Again, opportunity cost 85. Suppose you pay $2 for each ride you take on a roller coaster, and you are about to take your tenth and last ride for the day. The marginal cost of that ride is at least a. 0. 
 b. $2.** 
 c. It depends on the benefits you receive. 
 d. $20. 
 e. less than $2, because of diminishing marginal returns 
 Marginal cost is the cost of one more of something 86. Which of the following is not an assumption of the economic model? a. People respond to incentives. 
 b. Goods are scarce. 
 c. People make decisions by comparing marginal benefits and marginal costs. 
 d. The only costs that matter are opportunity costs. 
 e. All are assumptions of the economic model.** 
 87. You buy an all-day ski pass for $50, planning on taking 10 runs and getting $100 worth of enjoyment. After four runs, you find you’re not enjoying yourself and want to go home. According to the economic model, you should a. take at least one more run to get your money’s worth. 
 b.take a fifth run only if the benefit from it is at least $10. 
 c. take more runs unless you’ve gotten at least $50 worth of enjoyment already. 
 d.keep skiing until you’ve taken 10 runs. 
 e. go home. ** 
 You already paid which is a sunk cost so you should do what you currently value more which would be to go home 88. Suppose you spend the semester watching TV instead of studying economics (your next best alternative use of time). The cost is 
a. your hourly wage multiplied by hours of TV watched
 b. the price of the textbook you paid for but didn’t use 
 c. the tuition money you wasted
 d. the resulting decrease in your economics grade. ** e. All of the above 
 All the things you gave up to watch tv 89. If Bert can produce 25 cars or 25 trucks with the same resources that Ernie can produce 20 cars or 10 trucks, then a. Bert has the comparative advantage in cars; Ernie in trucks. 
 b. Bert has the comparative advantage in trucks; Ernie in cars. ** 
 c. Bert has the comparative advantage in both cars and trucks. 
 d. Both a and d. 
 Bert has the absolute advantage in both but Ernie’s opportunity cost in making trucks is higher therefore he will make cars 90. A trade that would make both Bert and Ernie better off is a. 1.5 cars for 1 truck**
 b. 1.5 trucks for 1 car
 c. 2 cars for 1 truck d. 1 car for 2.5 trucks
 e. No mutually beneficial trade is possible, because Bert is better at both cars and trucks Make a ratio. 25: 25 and 20:10 then simplify. 1:1 and 2:1. Meet in the middle of 1 and 2 91. Which the following are marginal benefits associated with studying economics for an extra hour? a. A higher grade in your economics class. 
 b. A higher overall GPA. 
 c. A better chance of getting a good job after graduation. 
 d. All of the above. ** 
 It’s the possibility of what you could gain from just one more hour 92. Which of the following are marginal costs associated with studying economics for an extra hour? a. The T.V. program you would otherwise have watched** 
 b. The cost of your economics textbook. 
 c. The tuition paid for that economics class 
 d. All of the above. 
 B and C are sunk costs 93. If you value a good at $25 and you buy it from Ed, who values it at $4, for a price of $10, you have created total gains from trade of a. $15. 
 b.$21. ** 
 c. $6. 
 Price is irrelevant. Only subtract the values 94. Your company is engaged in two projects, one of which has cost $25 million to date, the other of which has cost $10 million to date. It can only afford to finish one of the projects. The expected benefit from each project is the same. Which project should it finish? a. The $25 million project, because it has already invested so much. 
 b.The $10 million project, because it has cost so little thus far. 
 c. Whichever can be completed at the least additional cost. ** 
 d.Whichever will result in the lowest cost in total by the end of the project. 
 Whatever money has been spent is a sunk cost and irrelevant 95. In a market economy, resources are allocated primarily
 a. by a single central planner
 b. through the combined actions of millions of households. **
 c. by a few large corporations.
 d. by the government Board of Economic Planning in the Department of Commerce. 96. A rational decision-maker takes action only if a. the average benefit is greater than the average cost. 
 b.the marginal benefit is greater than the marginal cost. ** 
 c. the total benefit is positive. 
 d.society will be made better off. 
 e. All of the above 
 96. When airlines increase the number of safety inspections of their engines, a. there is no cost, since more safety benefits everybody. 
 b.there is no cost for society as a whole, since only a few firms are affected. 
 c. there is a cost only if firms are forced to cancel flights. 
 d.there is a cost because firms and consumers must give up something in return. ** 
 97. The cost of a college education includes a. tuition paid. 
 b.textbooks purchased. 
 c. a foregone salary at alternative employment. 
 d.All of the above. ** 
 e. Some but not all of the above. 
 99. If people are “rational” in the economic sense, they a. never make mistakes. 
 b. put making money before any other goal. c. seek only their own welfare.
 d. None of the above.** 
 Rational people make their choice at their margin 100. We have too much safety a. if the marginal cost of the last unit of safety was less than the marginal benefit. 
 b. if the total value of safety is negative. 
 c. if the marginal benefit of the last unit of safety was less than the marginal cost. ** 
 d. if no one ever gets hurt. 
 e. All of the above. 
 Benefits should exceed costs 101. The cost to a cinema owner of letting someone see a movie for free is a. always equal to the regular ticket price of $8.50. 
 b. usually more than the regular ticket price of $8.50. 
 c. likely to be higher on a Saturday night than on a Monday night. ** 
 d. always nothing if he/she owns the cinema. The cost of a seat is valued more on a Saturday night 102. Which of the following is a resource allocation question? a. Should the government allow mining or grazing on a parcel of public land? 
 b. Should new houses be built in San Diego or in Las Vegas or both, and how many? 
 c. Should my spouse and I have another child? 
 d. All of the above. ** 
 e. All except c. 
 103. When economists refer to tradeoffs, they are highlighting a. the existence of scarcity** 
 b. the fact that trade makes us better off 
 c. the importance of gains from trade 
 d. the importance of ensuring that gains from trade are distributed equitably 
 e. All of the above 
 Scarcity means that you have to give up something in order to get something. Pretty much all goods. I would choose E in this situation but… 104. The decision whether to purchase the breakfast “all you can eat” buffet versus ordering 
 from the menu at fixed prices a. is a marginal decision** not a marginal decision, because the “all you can eat” price will be sunk once you’ve paid it


Buy Material

Are you sure you want to buy this material for

50 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."

Anthony Lee UC Santa Barbara

"I bought an awesome study guide, which helped me get an A in my Math 34B class this quarter!"

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."

Parker Thompson 500 Startups

"It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.